By Michael Erman

Dow also said it had agreed with its lenders to an option that could extend its loan for the deal by a year, but it has reduced the size of the loan by $500 million to $12.5 billion.

The companies said in a joint statement that they could not predict the outcome of the talks and would not comment further. The dispute is scheduled to go to trial on Monday.

Rohm and Haas sued Dow in January to try to force the company to close the merger.

Dow agreed to buy Rohm and Haas last July for $78 a share, which represented a 74 percent premium, to broaden its product offerings in higher-margin markets such as paints, coatings and electronic materials.

But Dow balked at closing after a joint venture with Kuwait fell apart. Dow had intended to use proceeds from that $17.4 billion plastics joint venture to help fund the Rohm deal.

When it signed the agreement, Dow arranged for a one year, $13 billion loan from a consortium of banks. But Dow has argued that the loan was never intended to be the primary source of funding for the deal.

Dow said in a filing with the U.S. Securities and Exchange Commission on Friday that its lenders had cut the loan by $500 million and agreed to give Dow the option to extend the loan for another year, provided the company met certain conditions.

Those conditions include payment of an extension fee, reduction of the principal of the loan to less than $8 billion and compliance with a total leverage ratio.

EXTENDED LOAN

Michael Judd, an analyst at Greenwich Consultants, said the possible extension was positive toward getting the deal done.

"To the extent that they can extend, it gives them additional time to put in some additional financing," Judd said.

"It probably makes it easier for the deal to go through," but conversely, he said that the extension may make Dow's task more difficult if the case does go to trial.

Dow's case hinges on the argument that the merger could be disastrous to both companies. It has said the combination of the rapidly worsening economic environment with the collapse of a high-profile joint venture with Kuwait have made completing the deal under current conditions unduly arduous.

Judd said the renegotiation of the financing for the deal could take some of the steam out of this argument.

Rohm shares rose $9.76, or 18.1 percent, to $63.77 on the New York Stock Exchange. Dow shares had surged more than 15 percent after the announcement, and were up 46 cents, or 7.1 percent, at $6.93 on Friday afternoon.

(Reporting by Michael Erman; Editing by Lisa Von Ahn and Matthew Lewis)